Borrow/Lend System - How Lending Pools Work

TL;DR

Borrowing:

Borrow assets from a pool of lenders to use as margin or spot trading capital
Pay interest (APY) based on utilization - higher utilization = higher rates
Interest accrues continuously and is paid periodically (typically hourly)
Requires margin maintenance (can be liquidated if undercollateralized)

Lending:

Lend surplus assets to earn yield from borrower interest payments
Yield = utilization × borrow_rate × (1 - exchange_fee)
Lower yield when utilization is low (not all your capital is borrowed)
Can redeem lends subject to available liquidity

Interest Rate Model (Aave-style):

Rates scale with utilization via a two-slope curve
Below optimal utilization (~70%): gentle rate increase
Above optimal utilization: steep rate increase (incentivizes more lenders)

Key Difference from Perps: You borrow from other users (limited liquidity), not the exchange (infinite liquidity).

Why Borrow/Lend Exists
How Borrowing Works
How Lending Works
Interest Rate Model
Margin & Liquidation
Borrow/Lend vs Perpetuals
Throttling & Safety Mechanisms
Key Files

1. Why Borrow/Lend Exists

The Problem It Solves

In traditional spot trading, you need the full amount of an asset to trade:

Want to buy 1 BTC at $100k? You need $100k USDC.
Want to sell 1 BTC? You need 1 BTC.

Borrow/Lend enables:

Spot Margin Trading - Trade with leverage using borrowed capital
Short Selling - Borrow an asset to sell, buy back later at lower price
Capital Efficiency - Use one asset as collateral to access another
Yield Generation - Earn passive income by lending idle assets

Example: Shorting SOL on Spot

Without borrow/lend:

You: Have $10,000 USDC, think SOL will drop
Problem: Can't short on spot without owning SOL

With borrow/lend:

1. Deposit $10,000 USDC as collateral
2. Borrow 100 SOL (at $100/SOL)
3. Sell 100 SOL → receive $10,000 USDC
4. SOL drops to $80
5. Buy back 100 SOL for $8,000
6. Repay 100 SOL borrow
7. Profit: $2,000 (minus interest)

2. How Borrowing Works

When You Borrow

Check existing lends - If you have lends in the same asset, they're redeemed first (prevents flash loan scenarios)
Validate against book limits - Total borrowed can't exceed pool capacity or utilization caps
Validate margin - Must have IMF (Initial Margin Fraction) to open
Pay entry fee - Prorated interest for the current interval
Create borrow position - Tracked with negative net_quantity

Borrow Execution Flow

User calls borrow(symbol, quantity)
        │
        ▼
Check if user has existing lends
        │
        ├─ Yes → Redeem lend first (offset borrow)
        │
        ▼
Validate book state (Open? Under limit?)
        │
        ▼
Check utilization: (borrowed + new) / lent < max_utilization
        │
        ├─ Too high → Error: BorrowLendMaxUtilization
        │
        ▼
Check margin: margin_fraction > IMF
        │
        ├─ Insufficient → Error: InsufficientMargin
        │
        ▼
Execute borrow:
  - Update book: borrowed_quantity += quantity
  - Track position in open_borrows set
  - Charge entry fee (interest to end of interval)
  - Emit BorrowLendEvent

Entry Fee (Why You Pay Immediately)

When you borrow mid-interval, you pay interest for the remainder of that interval upfront:

Interval: 1 hour (3600000 ms)
You borrow at: 15 minutes into interval
Remaining: 45 minutes

Entry fee = borrow_rate × quantity × (45 min / 1 year)

This prevents gaming: you can't borrow just before interest payment,
then repay right after to avoid paying.

Key file: /engine/src/models/borrow_lend_book.rs:395-430

What You Can Borrow

Constraint	Description
Max Utilization	Can't push utilization above threshold (e.g., 95%)
Open Borrow Lend Limit	Hard cap on total borrowed amount
Throttle	Rate limit on how fast utilization can increase
Margin	Must maintain IMF after borrowing

3. How Lending Works

When You Lend

Check existing borrows - If you have borrows in the same asset, they're repaid first (reduces debt)
Validate against book limits - Total lent can't exceed pool capacity
Create lend position - Tracked with positive net_quantity

Lend Execution Flow

User calls lend(symbol, quantity)
        │
        ▼
Check if user has existing borrows
        │
        ├─ Yes → Repay borrow first (reduce debt)
        │
        ▼
Validate book state (Open?)
        │
        ▼
Check limits: lent + new < open_borrow_lend_limit
        │
        ├─ Exceeded → Error
        │
        ▼
Execute lend:
  - Update book: lent_quantity += quantity
  - Track position in open_lends set
  - Emit BorrowLendEvent

How You Earn Yield

Your yield depends on three factors:

Lend Yield = lent_quantity × lend_rate × time_fraction

Where:
  lend_rate = utilization × borrow_rate × (1 - fee)

Simplified:

Your share of borrowed assets × Interest they pay × Your cut (after exchange fee)

Example Yield Calculation

You lend: 10,000 USDC
Total lent: 100,000 USDC
Total borrowed: 70,000 USDC
Borrow rate: 10% APY
Exchange fee: 10%

Utilization = 70,000 / 100,000 = 70%

Your lend_rate = 70% × 10% × (1 - 10%) = 6.3% APY

Over 1 hour:
  Yield = 10,000 × 6.3% × (1 hour / 8760 hours)
        = 10,000 × 0.063 × 0.000114
        = $0.072

Not much per hour, but compounds!
Annual: ~$630 on $10,000

Redeeming Lends

You can withdraw your lends, subject to liquidity:

Max redeemable = lent_quantity - borrowed_quantity / max_utilization

Example:
  Lent: 100,000 USDC
  Borrowed: 70,000 USDC
  Max utilization: 95%

  Max redeemable = 100,000 - 70,000/0.95 = 100,000 - 73,684 = 26,316 USDC

If utilization is at max, you cannot redeem until:

Borrowers repay
New lenders deposit

4. Interest Rate Model

Aave-Style Two-Slope Curve

Backpack uses an Aave-inspired interest rate model with two slopes:

                    Interest Rate
                         │
                         │                        ╱
                         │                      ╱
                         │                    ╱   Slope 2 (steep)
                         │                  ╱
                         │          ┌─────╱
                         │        ╱ Kink point
                         │      ╱
                         │    ╱  Slope 1 (gentle)
                         │  ╱
                         │╱
        ─────────────────┼───────────────────────────
                         │ Optimal    100%  Utilization
                         │ (~70%)

The Formula

rust

// From: /core/types/src/math/borrow_lend_aave_interest.rs

if utilization < optimal_utilization {
    rate = base_rate + (utilization / optimal) × slope_one
} else {
    rate = base_rate + slope_one +
           ((utilization - optimal) / (1 - optimal)) × slope_two
}

Example Parameters

Parameter	Value	Meaning
`optimal_utilization`	70%	Where the kink occurs
`base_variable_borrow_rate`	0%	Minimum rate
`variable_rate_slope_one`	25%	Rate at optimal utilization
`variable_rate_slope_two`	60%	Additional rate above optimal

Rate Examples

Utilization	Borrow Rate	Calculation
0%	0%	Just base rate
35%	12.5%	0 + (35/70) × 25%
70% (optimal)	25%	0 + 25% (kink point)
85%	55%	0 + 25% + ((85-70)/(100-70)) × 60%
100%	85%	0 + 25% + 60% (max)

Why This Design?

Utilization Range	Behavior	Purpose
0% - optimal	Gentle increase	Encourage borrowing, capital efficiency
optimal - 100%	Steep increase	Discourage over-borrowing, attract lenders

The steep slope above optimal utilization creates urgency:

Borrowers: "Rates are expensive, I should repay"
Lenders: "High yields! I should lend more"

This self-balances the pool toward optimal utilization.

5. Margin & Liquidation

Borrow Positions Are Margin Positions

Just like perpetual futures, borrow/lend positions can be liquidated if your account becomes undercollateralized.

Margin Requirements

Threshold	Purpose	Typical Value
IMF (Initial Margin Fraction)	Required to open borrow	2-20%
MMF (Maintenance Margin Fraction)	Liquidation threshold	1-10%

How Borrows Affect Equity

Net Equity = Collateral Value + Unrealized PnL - Borrow Liability

Where:
  Collateral Value = Σ(asset_balance × mark_price × (1 - haircut))
  Borrow Liability = Σ(borrowed_quantity × mark_price)

Liquidation Flow

Account margin_fraction drops below MMF
        │
        ▼
Liquidation triggered
        │
        ▼
Borrow positions can be ADL'd (forced closed)
        │
        ├─ Lenders may be ADL'd if redemption liquidity insufficient
        │
        ▼
Account equity restored above MMF

Example: Borrow Liquidation

Initial State:
  Collateral: $10,000 USDC
  Borrow: 50 SOL @ $100 = $5,000 liability
  Equity: $10,000 - $5,000 = $5,000
  Margin Fraction: $5,000 / $5,000 = 100%

SOL price rises to $180:
  Collateral: $10,000 USDC (unchanged)
  Borrow: 50 SOL @ $180 = $9,000 liability
  Equity: $10,000 - $9,000 = $1,000
  Margin Fraction: $1,000 / $9,000 = 11.1%

If MMF = 10%, still safe.
If SOL hits $200:
  Equity: $10,000 - $10,000 = $0
  Margin Fraction: 0% → LIQUIDATED

Key insight: Borrowing an asset that appreciates = losing money (your debt grows).

6. Borrow/Lend vs Perpetuals

Key Differences

Aspect	Borrow/Lend	Perpetual Futures
Liquidity Source	Other users (limited pool)	Exchange (infinite)
Utilization Cap	Yes (can't borrow > lent)	No
Interest Type	Continuous APY based on utilization	Fixed funding rate (8hr)
Entry Cost	Entry fee (prorated interest)	None
Position Side	Asymmetric (borrow=debt, lend=credit)	Symmetric (long/short)
Redemption	Subject to liquidity	Direct settlement
Use Case	Spot margin, short selling	Leveraged speculation

When to Use Each

Scenario	Best Choice
Short-term leveraged bet	Perps (no entry fee, predictable funding)
Spot margin trading	Borrow/Lend
Short selling spot assets	Borrow/Lend
Earning yield on idle assets	Lend
Delta-neutral strategies	Both (depends on rates)

Interest vs Funding

Borrow/Lend:
  Rate changes with utilization
  You pay: borrowed_quantity × APY × time
  Rate can spike during high demand

Perpetuals:
  Rate changes with perp premium vs spot
  You pay/receive: position_notional × funding_rate
  Paid at fixed intervals (typically 8hr)

7. Throttling & Safety Mechanisms

Why Throttling?

Without limits, a single user could:

Borrow all available liquidity instantly
Prevent other users from redeeming lends
Manipulate interest rates

Throttle Mechanism

┌─────────────────────────────────────────────────────────┐
│                    Utilization Throttle                  │
├─────────────────────────────────────────────────────────┤
│                                                          │
│  utilization_threshold: 80%  ← Below this, no throttle  │
│  utilization_bound: 85%      ← Current max allowed      │
│  update_fraction: 10%        ← How fast bound moves     │
│                                                          │
│  Each interest interval:                                 │
│    bound moves toward 100% by update_fraction           │
│                                                          │
└─────────────────────────────────────────────────────────┘

How it works:

Below threshold (80%): No restriction
Above threshold: Can only borrow up to current utilization_bound
Bound slowly increases each interval
Prevents rapid utilization spikes

Max Utilization Cap

max_utilization: 95% (typical)

Even with throttle fully relaxed, utilization cannot exceed this.
Ensures lenders always have some redemption liquidity.

Book States

State	Borrows	Repays	Lends	Redeems
`Open`	Allowed	Allowed	Allowed	Allowed
`RepayOnly`	Blocked	Allowed	Blocked	Allowed
`Closed`	Blocked	Blocked	Blocked	Blocked

8. Key Files

Component	Location
Core Borrow/Lend Logic
Execute borrow/lend	`/engine/src/engine/borrow_lend/mod.rs`
Command handlers	`/engine/src/engine/borrow_lend/commands.rs`
Query handlers	`/engine/src/engine/borrow_lend/queries.rs`
Book State
BorrowLendBook struct	`/engine/src/models/borrow_lend_book.rs`
Book types	`/core/types/src/models/borrow_lend.rs`
Interest Rates
Interest payment processing	`/engine/src/engine/interest.rs`
Aave interest model	`/core/types/src/math/borrow_lend_aave_interest.rs`
Throttle logic	`/core/types/src/math/borrow_lend_throttle.rs`
Margin & Clearing
Borrow clearing	`/engine/src/clearing_house/clearing/borrow_lend.rs`
Position settlement	`/engine/src/clearing_house/settlement/borrow_lend.rs`
Position margin traits	`/engine/src/traits/position_margin.rs`
Liquidation
Liquidation orchestration	`/engine/src/engine/liquidation/mod.rs`
ADL selection	`/liquidator/src/context/backstop/positions.rs`

Summary

Question	Answer
What is borrow/lend?	Pool-based lending where users borrow from other users
When would I borrow?	Spot margin trading, short selling, capital efficiency
How do I earn yield?	Lend assets to the pool, earn interest from borrowers
How are rates determined?	Aave-style utilization curve (two slopes)
Can I be liquidated?	Yes, if your margin fraction drops below MMF
How is it different from perps?	Limited liquidity, continuous interest vs fixed funding
What prevents abuse?	Utilization caps, throttling, entry fees

Borrow/Lend System - How Lending Pools Work ​

TL;DR ​

Table of Contents ​

1. Why Borrow/Lend Exists ​

The Problem It Solves ​

Example: Shorting SOL on Spot ​

2. How Borrowing Works ​

When You Borrow ​

Borrow Execution Flow ​

Entry Fee (Why You Pay Immediately) ​

What You Can Borrow ​

3. How Lending Works ​

When You Lend ​

Lend Execution Flow ​

How You Earn Yield ​

Example Yield Calculation ​

Redeeming Lends ​

4. Interest Rate Model ​

Aave-Style Two-Slope Curve ​

The Formula ​

Example Parameters ​

Rate Examples ​

Why This Design? ​

5. Margin & Liquidation ​

Borrow Positions Are Margin Positions ​

Margin Requirements ​

How Borrows Affect Equity ​

Liquidation Flow ​

Example: Borrow Liquidation ​

6. Borrow/Lend vs Perpetuals ​

Key Differences ​

When to Use Each ​

Interest vs Funding ​

7. Throttling & Safety Mechanisms ​

Why Throttling? ​

Throttle Mechanism ​

Max Utilization Cap ​

Book States ​

8. Key Files ​

Summary ​